Another week, another HMRC initiative - this time, a 'Fresh approach to Business Records Checks'. No-one disputes that some of these initiatives are a good thing - let's face it, if someone is not declaring a dodgy Swiss bank account, then I am personally pleased that HMRC may well catch up with and punish them (and personally I would not allow them into the LDF - they've had more than one opportunity to disclose already). My concern about this latest initiative is that it seeks to bypass the accountant, not the first time that HMRC have attempted this.
The importance of business records
We all know that businesses need to keep adequate business records so that they can complete their tax returns correctly. The big issue is how detailed the records need to be to achieve that result, especially for smaller businesses. It is clear from comments in HMRC's Compliance Handbook (CH10200) that their stance on this matter has hardened of recent times:
'The records do not have to be in any particular format, but they should be up to date and kept in sufficient detail to:
• allow the person to make a correct and complete return• allow the person to calculate the correct amount of tax to be paid or claimed• enable us to check the figures on the return or claim.'
The emphases above are mine - fairly innocuous words but heavy obligations and ones which many businesses have neither the time nor expertise to meet.
HMRC's right to enquire
Intriguingly, the new legislation on powers, which was introduced in Schedule 36 FA 2008 and took effect from 1 April 2009, gives HMRC the right to require, in writing, a taxpayer to provide information or produce a document that is in their possession or power if it is reasonably required by the officer for the purpose of checking the taxpayer's tax position past, present or future.
However, if a return has been submitted for a chargeable period, a taxpayer notice can only be issued if one of the following conditions is satisfied:
• a notice of enquiry has been given and the enquiry is still open;
• an officer has reason to believe tax should be assessed for the enquiry period;
• any information is needed to check VAT position;
• any information is needed to check PAYE position.
A taxpayer has the right of appeal against a notice or any requirement in a notice. Importantly, this appeal right does not extend to any requirement to produce 'statutory records'. No right of appeal is most unusual in this country, so what is the definition of a statutory record? 'Statutory records' are the documents and information which a person is required to keep and preserve to fulfil their obligations under the Taxes Acts and VAT legislation.
Focussing on direct tax for a moment, what precisely is a taxpayer or business required to keep? S12B TMA 1970 states that:
'Any person who may be required by a notice...to make and deliver a return for a year of assessment or other period shall
(a) keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return for the year or period;
(3) In the case of a person carrying on a trade, profession or business alone or in partnership
(a) the records required to be kept and preserved...shall include records of the following, namely
(i) all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place, and
(ii) in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade;...'
Similar rules apply for companies (para 21 Sch 18 Finance Act 1998) but HMRC have always shied away from defining exactly what they think taxpayers should keep. Strangely, then, HMRC can force the production of a statutory record but there is no specific list of what constitutes such a record! A prime example over the years has been purely private bank accounts - these are not statutory records and so do not have to be retained per se.
HMRC's factsheet, Keeping Business Records, gives a few clues as to HMRC's views:
'A record of all sales and takings, including cash receipts. For example till rolls, sales invoices, bank statements, paying-in slips, accounting records.
A record of all purchases and expenses, including cash purchases. For example: receipts, purchase invoices, bank and credit card statements, cheque book stubs, accounting records.'
HMRC's interest in Business Records Checks (BRC) began in April 2011 and involved checks on the adequacy of SMEs business records. Until 17 February 2012, 3,431 BRC had been carried out and these had found that, according to HMRC, 36% of businesses had some issue with their record-keeping, of which 10% had what were referred to as '...issues serious enough to warrant a follow up visit'. 10% sound pretty good in my experience!
From February to 31 October 2012 HMRC redesigned the BRC process and started their new approach to BRC on 1 November 2012.
The new process
Apparently, customers who are more likely to be at risk of having inadequate records will be contacted by letter to arrange for HMRC to call them to go through a short questionnaire. How HMRC identify such businesses is not clear. It is also worth bearing in mind that there is no statutory authority for HMRC to make such a call or for the taxpayer to speak to HMRC, so it is not clear on what basis HMRC are asking the questions! I assume that HMRC would say that they are carrying out a real time review under their powers which cover enquiries/checks but ultimately the right to require information is covered by Sch 36.
Depending on the outcome of this call, HMRC then say that it will confirm to certain customers that no further action is required. Where some issues are identified, customers will be offered what are referred to as '...targeted self-help education options...', whatever that means! Customers who are identified as being at risk of keeping inadequate records will then be referred for a BRC visit.
HMRC visits to business premises
HMRC state the following:
'If we feel you need a face to face visit, HMRC will contact you to agree a date and time. The visit will usually take around two hours.'
This makes it sound as though a visit is obligatory. I would imagine that HMRC would refer to Sch 36 again, which allows HMRC to enter business premises and inspect the premises, any business assets on the premises or any business documents (statutory records) on the premises. Of course, taxpayers have the right to refuse a visit, although HMRC's guidance doesn't mention this small point!
At the visit the HMRC officer will discuss how the business is run, how the records are kept and do a sample-check of current business records for the last four months. Sounds like an enquiry to me.
If the officer finds that the record-keeping needs improving, they will:
'... discuss this with you and your agent, if they are at the meeting.'
This is the first mention of the accountant in this process. Surely, if there is an agent involved, HMRC should be ringing them first, not the taxpayer. It depends how cynical you are as to why HMRC are not doing so!
HMRC then state:
'It is not essential, but if you have an accountant or other professional advisor, you will be able to invite them to attend the visit.'How very kind of them! I would have thought it was vital!
Consequences of the visit
Strangely, the only focus on post-visit consequences is on record-keeping penalties, not on additional tax, interest and penalties arising from errors due to bad records. If the record-keeping is acceptable, although acceptable to whom and against what standard the comparison is made is not mentioned, HMRC will confirm this in writing.
If the records are inadequate, whatever this means, HMRC raise the possibility of a record-keeping penalty. It appears that HMRC are referring to the £3,000 penalty in s12B TMA 1970, worth bearing in mind as the guidance now develops.
HMRC state that they will give the business the opportunity and time to bring record-keeping up to an adequate standard, specifying what improvements need to be made, and will arrange a follow up visit to check that the necessary improvements have been made, usually within three months of the initial visit. If the improvements have been made, HMRC will reduce the penalty to nil. Now, not that I'm against this, but on what basis is this being done? Are HMRC stating that the penalty is suspended for three months, as suspension does not apply to s12B penalties?
If not, a penalty will apply. HMRC then state:
'The penalty is usually £500 for the first offence. For businesses in their first year of trading the penalty will be £250.'Good to know what HMRC policy is, as I have never seen such a statement before. Mind you, I've never seen a £3,000 penalty levied since it was brought in as part of self-assessment and CTSA, so I live and learn!
Please also note the most important statement:
'If during the business record check HMRC find that you have deliberately destroyed your records, a penalty of £3,000 would apply (this may be reduced to £1,500 if only some of your records are destroyed).'
Amazing! I will only set fire to some of them then!
Let's be clear, I have no problem with HMRC doing their job, especially as I used to do it too. However, I never tried to mislead people as to their rights and (hope) I took a common-sense view as to what businesses could and should be doing.
If this is an enquiry/check, then let HMRC be clear on this point, formalise the process, contact the accountant to let them know this, and inform the agent and client as to the powers that are being used and the appeal rights, then we all know where we stand.
Being less than forthright on these points may lead to some to believe that HMRC are trying to sneak in under the radar and then you get the vampire syndrome - if you hadn't invited them across your threshold they couldn't have come in but once you ask them in (to quote one of my heroes) '..I have nothing to offer but blood, toil, tears and sweat...'